Generally, municipal funds should be used only for municipal purposes. In other words a municipal corporation must use their public funds only for public purposes[i]. For instance, income from public land leased for private purposes must not be used for private purposes. Similarly, a municipal corporation should not undertake a private enterprise or assume any function that is not public or governmental. Even an express legislative sanction will not confer upon a municipal corporation the authority to use public funds for private purposes[ii].
The term “public purpose” when used in connection with the expenditure of municipal funds from the public treasury refers to such public purpose allotted to a particular municipality to be exercised for the benefit, welfare, and protection of its inhabitants and others coming within the municipal care[iii]. An expenditure aimed at serving a public purpose is legal even if there is a direct or incidental private benefit attached to such public purpose[iv]. However, the fact that an expenditure aimed at private purpose carries with it an incidental public purpose will not make such private purpose legal when public funds are used for the same[v].
Services that come under public purpose include: promotion of public health, safety, morals, general welfare, security, prosperity, and contentment of all the inhabitants or residents within a given political division[vi]. Usually, it is the legislature that makes declarations about the activities that come under public purpose. Declarations passed by the legislature regarding public purpose are generally presumed as valid and it should be considered as correct unless patently erroneous[vii].
Determining what constitutes a public purpose is primarily the province of the legislature. Therefore, a court will interfere only in those cases in which the governmental body’s discretion is unquestionably abused and appears to be clearly and unmistakably illegal[viii]. Where there is no question of abuse, a court will attach great weight to such municipal legislative determinations.
Generally, municipal funds are raised either by direct or indirect taxation. Therefore, using such funds for non public purposes will amount to taking the property of individuals under the guise of taxation for purposes that are non-public. A municipal corporation can borrow money if they do not have sufficient funds to carry out the public utility functions. The right of a municipal corporation to borrow money or to incur indebtedness is usually controlled by express constitutional, statutory, or charter provisions. In the absence of such express provisions, the general presumption is that there is no general municipal borrowing power granted to a municipal corporation.
Although a municipal corporation receives revenue from the operation of municipal utilities, such revenue are generally used for paying the cost of providing the service and bonded debt. The diversion of those revenues to other purposes is not allowed unless the obligations to the system are met. Therefore, the revenue derived from a municipally owned utility belongs to the municipality and can be used only for municipal purposes.
[i] State ex rel. Kuder v. City of Strongsville, 1996 Ohio App. LEXIS 959 (Ohio Ct. App., Cuyahoga County Mar. 14, 1996).
[ii] Bignell v. Cummins, 69 Mont. 294 (Mont. 1923).
[iii] Nash v. Tarboro, 227 N.C. 283 (N.C. 1947).
[iv] Port Authority of St. Paul v. Groppoli, 295 Minn. 1 (Minn. 1972).
[v] Burns v. Essling, 156 Minn. 171 (Minn. 1923).
[vi] Adams County Record v. Greater N.D. Ass’n, 529 N.W.2d 830 (N.D. 1995).
[vii] Pan. City Beach Cmty. Redevelopment Agency v. State, 831 So. 2d 662 (Fla. 2002).
[viii] Mt. Sinai Hospital v. Hyman, 92 A.D. 270 (N.Y. App. Div. 1904).